After a strong rally, where is the stock market headed next?
The US stock markets closed near six-month highs on Friday, extending gains for a third week. Since 2012 kicked off the Dow Jones Industrial Average is +4.1%, the S&P 500 is +4.6%, and the NASDAQ is +7.1%. This is the most the markets have moved up during the first few weeks of January since 1987. So will this rally continue?
Bullish investors point to three main reasons as to why it will:
1) Continued improvement in Europe
The European Central Bank has succeeding in reducing the stress in Europe’s banking center though long-term repo operations. The yield on Italian debt is the lowest it’s been in over a month and it seems (as I write this) that the Greek debt-swap accord is falling into place. Bulls believe that these steps foreshadow a Europe that will continue to rectify its problems in 2012.
2) Positive action in China
Though the manufacturing sector in China has been showing worrying signs of slowing, the government has demonstrated willingness to make conditions easier by lowering banks’ reserve requirements. Bullish investors anticipate that the Chinese government will continue to support growth in the months to come.
3) A strong earnings season
Last week a number of Dow components beats earnings estimates and moved higher on Friday: Microsoft +5.7%, IBM +4.4%, and Intel +2.9%. Bulls expect this trend to continue.
Bearish investors highlight two reasons why they are skeptical of this rally:
1) No fix concerning the European sovereign debt crisis
Though it seems as if the situation in Europe has improved, it is by no means fixed. The European Union will meet again on January 30th in another make-or-break summit. If Europe’s debt problems continue to worsen it could plunge the world into recession.
2) Very light volume
The average retail investor has been staying away from this stock market rally. Average daily volume on the NYSE hasn’t eclipsed 1 billion shares since Dec. 16 and volume has been above its current 50-day moving average just once in the last 6 sessions. Though the markets have seen many low-volume gains since the financial panic hit in 2008, the lack of participation by retail investors still spurs concerns over the rally’s durability.
What do you think? Who has it right – the bulls or the bears? Join the discussion below!
Notice Gold is going back up
Investors need a reality check. I think we are closer to a deflationary economy than one
with inflation despite what the lunatics at the FED are doing. Their solutions only work
in the short run.
when do the fundamentals kick in instead of investing in the lesser evils that exist ?
AS USUAL THE APPEARANCE IN THE MARKETS OF GROWTH CAN AS IT HAS IN PAST
MARKET CYCLES PROVE TO BE QUITE MISLEADING. STUDIES HAVE SHOWN THAT
EARNING ESTIMATES DON'T NECESSARILY CORRELATE WITH CONSISTENT UPWARD
MARKET MOVEMENT OR ECONOMIC GROWTH FOR THAT MATTER. CONTINUED BAILOUTS BY THE ECB AND THE FEDERAL RESERVE HERE ONLY INCREASE MONEY SUPPLY TO THE TUNE OF TRILLIONS OF DOLLARS THAT CONTINUE TO DEVALUE CURRENCIES EVERYWHERE. HUNDREDS OF TRILLIONS OF DOLLARS IN UNDELEVERAGED DEBT WORLD WIDE WILL OVERWHELM ALL PRINTING SPREES REGARDLESS OF THE QUANTITY. SHOULD THE MOVEMENT UP IN THE MARKETS IN JANUARY 1987 BE CAUSE FOR OPTIMISM THIS YEAR? BULLISH FOLK NEED TO BE REMINDED THAT IN OCTOBER THAT YEAR SOMETHING VERY UN-BULLISH OCCURRED! YOU'LL NEVER GUESS WHAT IT WAS. DO SOME ANALYSIS OF MARKET CYCLES OVER THE LAST SEVERAL CENTURIES AND YOU MIGHT LEARN SOMETHING, BULLS!
EDT
CHICAGO, ILLINOIS
The market has decided to ignore bad news, let it be. One real positive is the low volume and absence of individual investors (if it's individual investors who are absent); this is a good contrary indicator.
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